In the article about the “Kipper and Wipperzeit” we went through the relationship between the quality of money and its value. In the 17th century the quality of money was reduced, for example, by shaving or clipping material from silver coins. Another method was to melt silver coin and mix it with another material that was cheaper. Both methods reduced the quality and the value of money.
At the beginning of the 21st century we have to deal with a very new form of money, cryptocurrencies. Similarly to the silver coins of the 17th century the question regarding their quality remains.
With the rise of the Internet, a new currency was born, Bitcoin. Bitcoin had a couple of advantages. The electronic coin was limited to a certain number of coins (about 21 million). In a time where governments or central banks were printing huge amounts of money through quantitative easing, people wanted to hold something that was limited.
But does Bitcoin fulfil all the quality requirements for money? What are the regular quality requirements for money anyway? Generally speaking the following seven qualities have to be fulfilled by money:
- Generally acceptable
As mentioned before, the advantage of Bitcoin is scarcity (as it is limited to a total of about 21 million coins). But how about the other criteria? It is divisible, as one coin can be divided into similar parts. Is it generally accepted? Well it is not as accepted as cash, but on the other hand its acceptance is growing. Its biggest advantage is its portability as it can be easily transferred from one digital wallet to another. You only need a computer with Internet access. Could this easy way to transfer money internationally make Bitcoin acceptable all over the world? It is also homogeneous, durable and recognizable.
However, like other forms of money Bitcoin was also founded by speculators. The price of one coin was rising sharply from USD 125.49 on October 1, 2013 to USD 1147.27 on December 4, 2013. There were discussions that Bitcoin should replace the US Dollar as it was not controlled by any government or central bank. It was the money of free people. But more than this, at that time Bitcoin had become a speculative asset.
Some people realized this and sold to secure their gains. The prices tumbled to USD 320 in a few months. One reason that Bitcoin couldn’t hold its value and fell was that more new cryptocurrencies were developed such as Dogecoin, Litecoin or Mastercoin, just to name a few. So, even though the number of Bitcoins are limited the total number of all cryptocurrencies are not limited at all. However, I do believe in the future of Bitcoin or other cryptocurrencies because of their advantage to transfer money globally. Lately, the new currency was also rising sharply again.